Barry Eichengreen on Japan:
Japan rising? Shinzo Abe’s Excellent Adventure, by Barry Eichengreen, The Milken Institute Review: “I shot an arrow in the air, it fell to earth, I knew not where.” — Henry Wadsworth Longfellow
Longfellow, the early-19th-century American poet, was obviously not referring to the current Japanese prime minister, Shinzo Abe, but he could have been. What Abe calls his “three-arrows” economic-regeneration plan is a shot in the dark in a country generally not inclined to risk-taking. The first arrow, aggressive monetary easing, is designed to slay the dragon of deflation. The second, a one-time dose of fiscal stimulus, is intended to jump- start economic growth after more than two decades of stagnation. The third, a mix of structural reforms, is designed to boost productive efficiency, attract investment and render faster growth sustainable.
It remains to be seen whether Abe’s arrows will follow the trajectory he anticipates. On the first, the chattering classes seem evenly divided between those who doubt the Bank of Japan will succeed in ending deflation and those who fear that the inflation produced by monetary easing will spiral out of control. On the second, some wonder whether fiscal stimulus is, in fact, gilding the lily, warning that additional deficit spending by an already heavily indebted Japanese government could provoke a crisis of confidence.
Views are less divided when it comes to the third arrow, comprehensive structural reform. Here observers are all but unanimous in their approval – but question whether the weapon will even get off the ground. ...[continue reading]...